Siib c1

Capstone Business Simulation 2011: Competition Round 1 SIIB
In the Capstone competition rounds, hope you have paid due attention to:
Have you sat and brainstormed as a company (team) what is your companys
passion, what is your companys DNA, what excites you, what does your company want to
do? Remember, your company reflects you your thoughts, fears, aspirations, predilections,
caution, risk,etc. Now....
Given your passions and given the resources and capabilities that you possess, what
is your companys vision. Your vision is simply an expression of a desired end state (eight
years from now) that you wish to accomplish. Try and visualize it as accurately as possible. Now
given your vision and your strengths (capabilities and resources) what is the best for you to do
given a competitive environment. Thus you now...
Perform a Market Analysis, i.e market segments, market sizes, their growths and what is
the share you intend to capture. Remember, analysis of the market sizes, growths and your
share are a foundational part of your strategy.
Now formulate your strategy company and segment wide. Your strategy is nothing but
integrated and coordinated set of actions taken to exploit core competencies and gain
competitive advantage. Securing a competitive advantage is vital; else you will get what
everybody else gets.
And remember, the heart of business lies in the execution. Wonderful strategy, but poor
execution will let you down.
Please read the note on Outlining Your Strategy (at the end of this debrief): this was sent
to you during the practice rounds as well.
Please read the note (at the end of the debrief) on
Outlining Your Strategy
Competitive Advantage. Please read these notes carefully. Think about how
you will generate competitive advantage for your company on
Capstone.

IMP: Some of you were curious about the individual graded examination (CompXM) after you
finish the competition rounds. The Comp-XM is similar to Capstone. Here you would run a
business (far simpler and miniaturized as compared to Capstone) of your
own, INDIVIDUALLY as CEO. You would also be asked theoretical questions in the context of
your team. Each exam is similar yet unique. It is a 6-8 hour, single session, open book,
online exam. You will be given eight hours (to cater to breaks/meals), for the exam. The best
preparation for the exam is working on Capstone.
Passing the exam (50% is the pass bar) is mandatory for the Capstone certification.


Industry and Team Specific Points
C58754
General: An interesting start to the competition round. Observe how the business and
financial results of the teams have changed in the very first year of business. All teams
started on a perfectly level playfield. Run your businesses deliberately; losing customers
and profits weakens you and strengthens your competitors. The gap widens faster than
one anticipates. Remember the objective: profit maximization; therefore its not only
growth but profitable growth that is of significance. Think long term. Please make those
growth investments now. But in the bargain, do not bleed so unsustainably that you
become bankrupt in the short and mid-term..
Chester and Ferris made losses this year. Low sales for Ferris. The reasons for your low
sales are given below in the sales paragraph. The top-line for Digby has shown good
growth in the last financial year. Contribution margins are low for Andrews, Chester,
Digby and Ferris. You will find it hard to make a profit with contribution margins below
30%. Emergency loans were seen for Ferris. You are experienced managers now. Please
stay away from these cash flow crises. Please read the paragraph on emergency loans
below.
Stock Price and Market Cap: Erie had a rise in stock price of $3.5/share. Andrews, Baldwin,
Chester, Digby and Ferris had a fall in stock price $0.5/share, $0.8/share, $5.6/share,
$3.1/share and $33.3/share. Ferriss stock price took a massive tumble of $33.3 caused by
losses and emergency loans. Erie is the most valuable company with a market capitalization of
$75M.
The impact of Dividends:
Remember, dividends are averaged over the past two rounds. Second, stockholders will ignore
dividend amounts above either:
This year's EPS, or
Or if EPS is falling, the average EPS over the past two years
One other factor drives stock price Book Value. If you pay out more than the EPS, it follows
that book value must fall and with it the stock price.
Sales: Baldwin, Chester, Digby and Erie had a rise in market share of 1.4%, 0.5%, 2.2% and
1% respectively. Andrews and Ferris had a fall in market share of 0.1% and 5% respectively
Each 1% market share in this round was worth almost $10M. Large losses in market share
often mean some high profile firings: think of the consequences in the real world. Your sales
should have been in the region of $115 M if you were retaining market share.
Low sales for Ferris. This was caused by:

Poor product specifications (performance and size); look at the ideal spot on the
perceptual map. Look at your product specifications. If you do not offer the customers
the specifications they desire, sales will suffer.
Low customers awareness levels for your products due to low promo budgets.
Poor distribution reach and accessibility for your product caused by low sales budget.
Please pay more attention to the 4Ps of marketing: improve your sales.
Chester, Erie and Ferris have introduced new products in the market. Each team can
launch up to three new products. More products help you capture more market share.
Profits: Chester and Ferris had bottom lines in red. The reasons for your lower profits are
easy to see now. Lets us not repeat mistakes:
Low Contribution Margin
High unnecessary depreciation of plant and machinery due to low plant usage. Why
keep a plant that only gathers dust.
High Unsold Inventory and the attendant carrying cost for Ferris.
High interest expense for highly leverage companies like Ferris. However, they could be
gearing for higher growth here.
Profits are important: Thats our raison dtre for running the company.
Contribution Margin: Andrews, Chester, Digby and Ferris have low contribution margins.
Please maintain your margins above 30%. Please automate your plants to bring down your
labor bill. Please price better.
Once again to jog your memory:
Contribution margin is defined as:
Sales - (Direct Labour + Direct Materials + Inventory Carry)

Sales

It is reported on Page 1 of the Capstone Courier as an aggregate average of each team's
product portfolio. A good benchmark for contribution margin is 30%. A product-by-product
margin computation is available on the Income Statement portion of your company's annual
reports.
Margins are driven by both price and cost. Check to see which of these problems you have:

Are your prices too low? "Variable Margin" is the margin that you make on each unit. It
is defined as:

o Price - (Direct Labour + Direct Materials)
Price
o
From your variable margin you pay for depreciation, R&D, promotion, sales,
admin costs, etc. A good benchmark for variable margin is 38%. You will find
Contribution Margins on the Production Sheet in your Capstone software.
Are your MTBF ratings set too high? MTBF ratings affect material costs. Check the
MTBF ratings of each product against the "Customer Buying Criteria" on pages 5-9 of
the Courier. Are they higher than they need to be? Example: If the MTBF range is
12,000-17,000, and it is the 4th buying criteria (as it is in the Low End segment), there is
little benefit in having MTBF set higher than the minimum. The Low End customer is
saying to you that given a choice between reliability and price, they prefer price.
Is your positioning too advanced? Material costs at the leading edge of a segment are
$4 higher than at the trailing edge. If the customer values price more than positioning,
sacrifice positioning.
Is your labour content too high? Labour content is the percentage of Cost of Goods
(COG) consumed by labour expense. For example, if COG is $10, and labour costs are
$4, your labour content is 40%. You can reduce labour content with automation. To a
lesser degree, you can also limit labour content by eliminating overtime and by
negotiating for a more favourable labour contract. A good benchmark for labour content
in Capstone is 30%.
Are you dropping price to increase market share? If so, recognize that Capstone
customers have no loyalty based upon past purchases, and they endure no switching
costs. Customer behaviour is driven by product attributes, awareness, and accessibility.
Are you dropping price to respond to competition? Check your competitor's
margins. Are they making money? Losing money? If they are losing money, resist the
temptation to follow them. While your unit volume will fall, it is more important to stay
profitable. Thank your competitor for losing money. They will soon discover that they
cannot sustain the losses and will want to raise their price. If you have lowered yours,
the industry will be trapped in a price war. On the other hand, if you discover that they
are making money because they have attacked their cost structure and are passing
along savings to customers, you have a serious problem. Address your costs,
differentiate so you can maintain your price, or get out of the segment.
Emergency Loans: Ferris has an emergency loan. As experienced managers now, you
should avoid emergency loans at all cost. Your company will get pummel on the bourses if
you cannot manage your cash. The reasons for your emergency loans are
Ferris - For plant improvements of $12.9M, you raised $8M from long term debt. You
also have high unsold inventory worth $42M. Raise funds from long term and current
debt to repay this emergency loan.

Please remember: emergency loan is current debt: you have to repay it in the next year.
Please err on the side of caution when it comes to managing cash. Get rid of your
emergency loan ASAP.
This is the growth phase for your company. A small loss could be understood as youve had to
make tough decisions considering a long term perspective. But, an emergency loan is never
acceptable. Cash flow mgmt is foundational.
Plant Size and Utilization: Andrews, Baldwin, Erie and Ferris have not even used the first
shift capacity of the plant (the plant has 2 shifts). This has lead to an unnecessary depreciation
burden. For example: Erie could have produced the same 4.2M units with a capacity of 2.1M
units instead of the current capacity of 4.5M units. By this they would have a depreciation
expense of only of $3.3M instead of the $7.1M they currently have. This means $3.8M more in
EBIT. Interesting!
Asset Turnover: Ferris have an asset turnover of below one. Please work your assets
harder. Your assets have to justify their place on their balance sheet. Make them generate more
sales per unit of asset.
Forecasting and Inventory: Ferris has high levels of unsold inventory. Please restrict your
production in the next round so that you may reduce this inventory level. Inventory levels create
an excess burden in terms of carrying costs on profits and block cash. Remember, producing
more does not mean selling more. On the other hand, stocking out means huge opportunity
cost. Ideally, inventory levels should be one unit for every product. But this is quite difficult
(impossible) to achieve. Forecast better and try to reduce inventory to the minimum possible
level without stocking out.
Inventory Reserves
Inventory expansions are the number one cause of emergency loans. This can be further
broken down into two root causes forecasting, and inadequate inventory reserves.
By inventory reserves we mean, How much inventory are we willing to accumulate during the
year in our worst case? We express this as days of inventory.
Suppose the gross margin is 30%. If so, then the cost of inventory consumes 70% of every
sales dollar. If sales are $100 million, over the course of a year the company spends $70 million
on inventory. In one day it spends $191 thousand. In 30 days it spends $5.7 million. In 90 days
$17.3 million.
We are interested in how many days of inventory the company planned to be able to absorb,
because if inventory expanded beyond this, it would see Big Al for an emergency loan.
To find inventory reserves we determine cash and inventory positions on January 2nd, after all
the dust has settled from borrowing, stock issues, bond issues, debt retirement, etc.

Inventory reserves in days = ((Starting Cash + Starting Inventory)/COG) * 365. For example, if
starting cash and inventory totalled 30 million on January 2nd, and annual cost of goods is
expected to be $120 million, then days of inventory was $30/$120 * 365 or 91 days.
If the company sells its entire inventory, it converts it all to cash. The more inventory
accumulated, the more that cash is crystallized as inventory. Eventually the company runs out
of cash and turns to Big Al to pay for the inventory that has accumulated in the warehouse.
Companies can develop an inventory reserves policy by considering their worst case forecast
for sales. If the inventory policy is 90 days, they can plan the production schedule so that they
will have (1 + 90/365) = 125% of their worst case forecast, including any starting inventory.
Companies cannot predict what competitors will do in detail. Therefore, companies plan for the
worst and hope for the best.
Trouble is highly likely to occur when inventory reserves are less than 30 days. The company
may get away with it, but that requires both precise forecasting and predictable competitors or,
more likely, lots of luck.
Trouble appears in a different form when inventory reserves exceed five months. Now the
company has idle assets, which should either have been put to work or given back to the
stockholders.
Segment Wise Product Analysis:
Traditional Segment: Digby leads the industry.
Low End Segment: Andrews leads the industry.
High End Segment: Digby leads the industry. Cid is overpriced (outside the price
range).
Performance Segment: Erie leads the industry. Coat is overpriced.
Size Segment: Digby leads the industry. Cure is overpriced (outside the price range).
Financial Management: Erie is low on leverage. ROA time leverage is ROE. Remember?
Plant Purchases Funded
Failure to fully fund plant purchase is another cause of emergency loans. The error occurs
because companies often count on profits or perhaps inventory reductions that do not
materialize.
Funding sources include:
1. Depreciation
2. Stock issue
3. Bond issues
4. Excess current assets

Depreciation often confuses participants as a source of funding. While we do pay cash for
expenses like promotion or inventory, we never actually pay cash for depreciation. And yet
governments allow businesses to deduct depreciation as an expense, thereby reducing profits
and taxes. Why?
Governments want businesses to continue to pay taxes, and they agree that equipment wears
out and must be replaced. The purpose of depreciation is to set aside a guaranteed cash
flow that can be used for the purchase of new plant and equipment. Teams can successfully
argue that cash from depreciation is a valid source of funding.
Stock and bond issues raise long term funds for any investment in the company.
Excess current assets can be defined as anything greater than the current assets required to
operate in our worst case scenario. For our purposes, we assume that teams need a minimum
of 90 days of inventory, 30 days of accounts receivable, and $1 of cash. Of course, teams might
want to have deeper reserves, but in applying the rubric to Plant Purchases, we allow
companies to apply anything above this minimum to plant purchases. We use the January 1st
balance sheet (same as the December 31st balance sheet from last years reports) to discover
starting current assets.
If the sum of the companys funding sources is greater than its plant purchases, the company
fully funded the purchase. If the shortfall is less than $4 million, it is plausible that its intention
was to reduce the current asset base by $4 million. If the funding shortfall is $8 million, it is
conceivable albeit unlikely that the shortfall was planned. Anything more than $8 million is
cutting deeply into current assets, and will likely result in an emergency loan.

C58755
General: Good start. Observe how the business and financial results of the teams have
changed in the very first year of business. All teams started on a perfectly level playfield.
Run your businesses deliberately; losing customers and profits weakens you and
strengthens your competitors. The gap widens faster than one anticipates. Remember
the objective: profit maximization; therefore its not only growth but profitable growth
that is of significance. Think long term. Please make those growth investments now. But
in the bargain, do not bleed so unsustainably that you become bankrupt in the short and
mid-term..
Baldwin and Erie made losses this year. Low sales for Baldwin. The reasons for your low
sales are given below in the sales paragraph. The top-line for Andrews has shown good
growth in the last financial year. Contribution margins are low for Andrews, Baldwin,
Chester and Erie. You will find it hard to make a profit with contribution margins below
30%. Emergency loans were seen for Andrews, Baldwin, Erie and Ferris. You are
experienced managers now. Please stay away from these cash flow crises. Please read
the paragraph on emergency loans below.

Stock Price and Market Cap: Chester and Digby had a rise in stock price of $2.1/share and
$10.4/share. Andrews, Baldwin, Erie and Ferris had a fall in stock price of $9.8/share,
$24.6/share, $9.6/share and $1/share. Baldwins stock price took a massive tumble of $24.6
caused by losses and emergency loans. Digby is the most valuable company with a market
capitalization of $89M.
This year's EPS, or
Sales: Andrews, Chester, Digby, Erie and Ferris had a rise in market share of 1.5%, 1.5%,
0.4%, 1.1% and 1.2% respectively. Baldwin had a fall in market share of 5.7%.
Low sales for Baldwin. This was caused by:
Baldwin and Chester have introduced new products in the market. Each team can launch
up to three new products. More products help you capture more market share.
Profits: Baldwin and Erie had bottom lines in red. The reasons for your lower profits are
High Unsold Inventory and the attendant carrying cost.

Contribution Margin: Andrews, Baldwin, Chester and Erie have low contribution margins.
Please maintain your margins above 30%. Please automate your plants to bring down your
labor bill. Please price better.

Sales

reports.

is defined as:
Price
o
in Capstone is 30%.

Emergency Loans: Andrews, Baldwin, Erie and Ferris have emergency loans. As
experienced managers now, you should avoid emergency loans at all cost. Your company
will get pummel on the bourses if you cannot manage your cash. The reasons for your
emergency loans are
Andrews - For plant improvements of $19.4M, you raised $3.5M from long term debt.
You also have high unsold inventory worth $24.6M. Raise funds from long term and
current debt to repay this emergency loan.
Baldwin You have high unsold inventory worth $29.3M. Raise funds from long term
and current debt to repay this emergency loan.
Erie You had high unsold inventory worth $29.2M. Raise funds from long term and
Ferris For plant improvements of $10.4M, you raised $8M from current debt. Do you
buy a house using a credit card? Raise funds from long term sources for long term
investments. You also have high unsold inventory worth $24.6M. Raise funds from long
term and current debt to repay this emergency loan.
Plant Size and Utilization: Ferris has not even used the first shift capacity of the plant (the
plant has 2 shifts). This has lead to an unnecessary depreciation burden.
Asset Turnover: Baldwin has an asset turnover of below one. Please work your assets
harder. Your assets have to justify their place on their balance sheet. Make them generate more
sales per unit of asset.

Forecasting and Inventory: Andrews, Baldwin, Erie and Ferris have high levels of unsold
inventory. Please restrict your production in the next round so that you may reduce this
inventory level. Inventory levels create an excess burden in terms of carrying costs on profits
and block cash. Remember, producing more does not mean selling more. On the other hand,
stocking out means huge opportunity cost. Ideally, inventory levels should be one unit for every
product. But this is quite difficult (impossible) to achieve. Forecast better and try to reduce
inventory to the minimum possible level without stocking out.
Inventory Reserves
$17.3 million.

stockholders.
Low End Segment: Chester leads the industry. Dell and Bead do not have the ideal
age for this segment.
High End Segment: Erie leads the industry. Bid needs improvement in its spec.
Performance Segment: Baldwin leads the industry. Foam and Aft are overpriced.
Size Segment: Baldwin leads the industry. Agape and Cure are overpriced (outside the
price range).
Financial Management: Digby is low on leverage. ROA time leverage is ROE. Remember?
materialize.
1. Depreciation
2. Stock issue
3. Bond issues
and taxes. Why?


C58756
General: Well done! Observe how the business and financial results of the teams have
changed in the very first year of business. All teams started on a perfectly level playfield.
Run your businesses deliberately; losing customers and profits weakens you and
strengthens your competitors. The gap widens faster than one anticipates. Remember
the objective: profit maximization; therefore its not only growth but profitable growth
that is of significance. Think long term. Please make those growth investments now. But
in the bargain, do not bleed so unsustainably that you become bankrupt in the short and
mid-term..
Digby and Erie made losses this year. The top-line for Digby has shown good growth in
the last financial year. Contribution margins are low for Chester and Erie. You will find it
hard to make a profit with contribution margins below 30%. Emergency loans were seen
for Digby and Erie. You are experienced managers now. Please stay away from these
cash flow crises. Please read the paragraph on emergency loans below.
Stock Price and Market Cap: Andrews had a rise in stock price of $2/share. Baldwin,
Chester, Digby, Erie and Ferris had a fall in stock price $2.7/share, $1.4/share, $7.7/share,
$33.2/share and $0.8/share. Eries stock price took a massive tumble of $33.2 caused by
losses and emergency loans. Ferris is the most valuable company with a market capitalization
of $80M.
This year's EPS, or

Sales: Andrewss market share remained constant. Baldwin, Digby and Ferris had a rise in
market share of 0.1%, 1.6% and 1.1% respectively. Chester and Erie had a fall in market
share of 0.6% and 2.2% respectively
Baldwin and Chester have introduced new products in the market. Each team can launch
up to three new products. More products help you capture more market share.
Profits: Digby and Erie had bottom lines in red. The reasons for your lower profits are easy
to see now. Lets us not repeat mistakes:
Low Contribution Margin for Erie
High Unsold Inventory and the attendant carrying cost for Erie.
High interest expense for highly leverage companies for Erie. However, they could be
gearing for higher growth here.
Contribution Margin: Chester and Erie have low contribution margins. Please maintain
your margins above 30%. Please automate your plants to bring down your labor bill. Please
price better.

Sales

reports.

is defined as:

Price
o
in Capstone is 30%.
Emergency Loans: Digby and Erie have emergency loans. As experienced managers
now, you should avoid emergency loans at all cost. Your company will get pummel on the
bourses if you cannot manage your cash. The reasons for your emergency loans are
Andrews - For a cash outflow of $22.6M (plant improvements + dividends + retirement
of current debt), you raised $0.1M from sale of stock. You also have high unsold
inventory worth $37M. Raise funds from long term and current debt to repay this
emergency loan.

Baldwin For a cash outflow of $20M (plant improvements + dividends), you did not
raise a penny. You also have high unsold inventory worth $23M. Raise funds from long
term and current debt to repay this emergency loan.
Chester For a cash outflow of $43M (plant improvements + dividends + purchase of
stock + retirement of long term debt), you raised $9M from long term debt. Raise funds
from long term and current debt to repay this emergency loan.
Digby For a cash outflow of $46M (plant improvement + dividends), you raised $40M
(sale of stock + long term debt + current debt). You also have high unsold inventory
worth $37M. Raise funds from long term and current debt to repay this emergency loan.
Plant Size and Utilization: All teams have not even used the first shift capacity of the plant
(the plant has 2 shifts). This has lead to an unnecessary depreciation burden.
Asset Turnover: Baldwin and Erie have asset turnover of below one. Please work your
assets harder. Your assets have to justify their place on their balance sheet. Make them
generate more sales per unit of asset.
Forecasting and Inventory: Erie has high levels of unsold inventory. Please restrict your
Inventory Reserves
$17.3 million.

stockholders.
Low End Segment: Chester leads the industry. Ebb does not have the ideal age for
this segment.
High End Segment: Baldwin leads the industry. Echo is overpriced (outside the price
range).
Performance Segment: Digby leads the industry.
Size Segment: Digby leads the industry. Egg is overpriced (outside the price range).
Financial Management: Chester and Ferris are low on leverage. ROA time leverage is ROE.
Remember?
materialize.

1. Depreciation
2. Stock issue
3. Bond issues
and taxes. Why?

C58757
General: An interesting start to the competition round. Observe how the business and
financial results of the teams have changed in the very first year of business. All teams
started on a perfectly level playfield. Run your businesses deliberately; losing customers
and profits weakens you and strengthens your competitors. The gap widens faster than
one anticipates. Remember the objective: profit maximization; therefore its not only
growth but profitable growth that is of significance. Think long term. Please make those
growth investments now. But in the bargain, do not bleed so unsustainably that you
become bankrupt in the short and mid-term..

Baldwin, Chester and Digby made losses this year. Low sales for Baldwin. The reasons
for your low sales are given below in the sales paragraph. The top-line for Andrews has
shown good growth in the last financial year. Contribution margins are low for Ferris and
Erie. You will find it hard to make a profit with contribution margins below 30%.
Emergency loans were seen for Baldwin, Chester and Digby. You are experienced
managers now. Please stay away from these cash flow crises. Please read the paragraph
on emergency loans below.
Stock Price and Market Cap: Except Erie, all teams had a fall in stock price. Erie had a rise
in stock price of $4/share. Chesters stock price took a massive tumble of $24.7 caused by
losses and emergency loans. Erie is the most valuable company with a market capitalization of
$77M.
This year's EPS, or
Sales: Andrews, Erie and Ferris had a rise in market share of 1.8%, 1% and 0.5%
respectively. Baldwin, Chester and Digby had a fall in market share of 2.1%, 0.3% and 1%
respectively
Baldwin, Digby and Erie have introduced new products in the market. Each team can
launch up to three new products. More products help you capture more market share.
Profits: Baldwin, Chester and Digby had bottom lines in red. The reasons for your lower
profits are easy to see now. Lets us not repeat mistakes:
High Unsold Inventory and the attendant carrying cost for Chester and Digby.

Contribution Margin: Erie and Ferris have low contribution margins. Please maintain your
margins above 30%. Please automate your plants to bring down your labor bill. Please price
better.

Sales

reports.

is defined as:
Price
o
in Capstone is 30%.

Emergency Loans: Baldwin, Chester, Digby and Ferris have emergency loans. As
emergency loans are
Baldwin - For plant improvements of $21.8M, you did not raise a penny. Raise funds
from long term and current debt to repay this emergency loan.
Chester For plant improvements of $15.5M, you raised $5M from long term debt. You
also have high unsold inventory worth $26.8M. Raise funds from long term and current
debt to repay this emergency loan.
Digby You raised sufficient funds but had high unsold inventory worth $26.1M. Raise
funds from long term and current debt to repay this emergency loan.
Ferris For plant improvements of $2.8M, you did not raise a penny. You also have
high unsold inventory worth $21.8M. Raise funds from long term and current debt to
repay this emergency loan.
Plant Size and Utilization: Baldwin, Chester, Digby, Erie and Ferris have not even used the
first shift capacity of the plant (the plant has 2 shifts). This has lead to an unnecessary
depreciation burden.
Asset Turnover: Baldwin, Chester and Digby have asset turnover of below one. Please
work your assets harder. Your assets have to justify their place on their balance sheet. Make
them generate more sales per unit of asset.

Forecasting and Inventory: Chester, Digby and Ferris have high levels of unsold inventory.
Please restrict your production in the next round so that you may reduce this inventory level.
Inventory levels create an excess burden in terms of carrying costs on profits and block cash.
Remember, producing more does not mean selling more. On the other hand, stocking out
means huge opportunity cost. Ideally, inventory levels should be one unit for every product. But
this is quite difficult (impossible) to achieve. Forecast better and try to reduce inventory to the
minimum possible level without stocking out.
Inventory Reserves
$17.3 million.

stockholders.
Traditional Segment: Ferris leads the industry.
Low End Segment: Erie leads the industry. Dell does not have the ideal age for this
segment.
High End Segment: Chester leads the industry.
Performance Segment: Andrews leads the industry.
Size Segment: Chester leads the industry.
materialize.
1. Depreciation
2. Stock issue
3. Bond issues
and taxes. Why?


C58758
General: Observe how the business and financial results of the teams have changed in
the very first year of business. All teams started on a perfectly level playfield. Run your
businesses deliberately; losing customers and profits weakens you and strengthens
your competitors. The gap widens faster than one anticipates. Remember the objective:
profit maximization; therefore its not only growth but profitable growth that is of
significance. Think long term. Please make those growth investments now. But in the
bargain, do not bleed so unsustainably that you become bankrupt in the short and mid-
term..
Andrews and Chester made losses this year. Low sales for Chester. The reasons for your
low sales are given below in the sales paragraph. The top-line for Baldwin has shown
good growth in the last financial year. Contribution margins are low for all teams except
for Baldwin. You will find it hard to make a profit with contribution margins below 30%.
Emergency loans were seen for Andrews, Chester, Digby and Ferris. You are
experienced managers now. Please stay away from these cash flow crises. Please read
the paragraph on emergency loans below.
Stock Price and Market Cap: Baldwin, Digby and Erie had a rise in stock price of $13/share,
$4/share and $12/share respectively. Andrews, Chester and Ferris had a fall in stock price of
$33/share, $8/share and $7/share respectively. Andrewss stock price took a massive tumble
of $33 caused by losses and emergency loans. Baldwin is the most valuable company with a
market capitalization of $95M.
This year's EPS, or

Sales: Baldwin, Erie and Ferris had a rise in market share of 3.5%, 2% and 2.1% respectively.
Digbys market share remained constant. Andrews and Chester had a fall in market share of
3% and 4.8% respectively
Low sales for Chester. This was caused by:
Except Andrews, none of the teams have introduced new products in the market. Each
team can launch up to three new products. More products help you capture more market share.
Profits: Andrews and Chester had bottom lines in red. The reasons for your lower profits
are easy to see now. Lets us not repeat mistakes:
High Unsold Inventory and the attendant carrying cost.
High interest expense for highly leverage companies for Andrews. However, they could
be gearing for higher growth here.
Contribution Margin: Andrews, Chester, Digby, Erie and Ferris have low contribution
margins. Please maintain your margins above 30%. Please automate your plants to bring down
your labor bill. Please price better.
Sales - (Direct Labor + Direct Materials + Inventory Carry)

Sales


reports.

is defined as:
o Price - (Direct Labor + Direct Materials)
Price
o
Is your labor content too high? Labor content is the percentage of Cost of Goods
(COG) consumed by labor expense. For example, if COG is $10, and labor costs are $4,
your labor content is 40%. You can reduce labor content with automation. To a lesser
degree, you can also limit labor content by eliminating overtime and by negotiating for a
more favorable labor contract. A good benchmark for labor content in Capstone is 30%.
costs. Customer behavior is driven by product attributes, awareness, and accessibility.
Emergency Loans: Andrews, Chester, Digby and Ferris have emergency loans. As

emergency loans are
Andrews - For plant improvements of $32.2M, you did not raise a penny. You also have
high unsold inventory worth $54.7M. Raise funds from long term and current debt to
repay this emergency loan.
Chester You have high unsold inventory worth $28M. Raise funds from long term and
Digby You have high unsold inventory worth $30.7M. Roll over your current debt in the
next round.
Ferris For plant improvements of $11.6M, did not raise a penny. You also have high
unsold inventory worth $31M. Raise funds from long term and current debt to repay this
emergency loan.
Plant Size and Utilization: Baldwin and Chester have not even used the first shift capacity of
the plant (the plant has 2 shifts). This has lead to an unnecessary depreciation burden.
Asset Turnover: Andrews and Chester have an asset turnover of below one. Please work
your assets harder. Your assets have to justify their place on their balance sheet. Make them
generate more sales per unit of asset.
Forecasting and Inventory: Andrews, Chester, Digby and Ferris have high levels of unsold
inventory. Please restrict your production in the next round so that you may reduce this
inventory level. Inventory levels create an excess burden in terms of carrying costs on profits
and block cash. Remember, producing more does not mean selling more. On the other hand,
stocking out means huge opportunity cost. Ideally, inventory levels should be one unit for every
product. But this is quite difficult (impossible) to achieve. Forecast better and try to reduce
inventory to the minimum possible level without stocking out.
Inventory Reserves

$17.3 million.
stockholders.
Traditional Segment: Ferris leads the industry.
Low End Segment: Digby leads the industry. Ebb and Feat do not have the ideal age
for this segment.
High End Segment: Baldwin leads the industry. Echo and Cid need improvement in
their specs. Bid, Adam and Dixie are overpriced (outside the price range).
Performance Segment: Baldwin leads the industry. Foam needs improvement in its
spec. Dot is overpriced (outside the price range).
Size Segment: Baldwin leads the industry. Agape and Cure need improvement in their
specs. Agape and Dune are overpriced (outside the price range).
Financial Management: Baldwin, Digby and Erie are low on leverage. ROA time leverage is
ROE. Remember?

materialize.
1. Depreciation
2. Stock issue
3. Bond issues
and taxes. Why?

C58759
General:. Observe how the business and financial results of the teams have changed in
the very first year of business. All teams started on a perfectly level playfield. Run your
businesses deliberately; losing customers and profits weakens you and strengthens
your competitors. The gap widens faster than one anticipates. Remember the objective:

profit maximization; therefore its not only growth but profitable growth that is of
significance. Think long term. Please make those growth investments now. But in the
bargain, do not bleed so unsustainably that you become bankrupt in the short and mid-
term..
Chester and Digby made losses this year. Low sales for Chester. The reasons for your
low sales are given below in the sales paragraph. The top-line for Baldwin has shown
good growth in the last financial year. Contribution margins are low for Baldwin, Chester
and Erie. You will find it hard to make a profit with contribution margins below 30%.
Emergency loans were seen for Baldwin. You are experienced managers now. Please
stay away from these cash flow crises. Please read the paragraph on emergency loans
below.
Stock Price and Market Cap: All the teams had a fall in stock price. Andrews is the most
valuable company with a market capitalization of $66M.
This year's EPS, or
Sales: Andrews, Baldwin, Chester and Erie had a rise in market share of 2.1%, 3%, 0.1%
and 1.9% respectively. Digby and Ferris had a fall in market share of 3.4% and 3.6%
respectively
Low sales for Ferris. This was caused by:
None of the teams have introduced new products in the market. Each team can launch up to
three new products. More products help you capture more market share.

Profits: Chester and Digby had bottom lines in red. The reasons for your lower profits are
Low Contribution Margin for Chester
High Unsold Inventory and the attendant carrying cost for Chester.
High interest expense for highly leverage companies. However, they could be gearing
for higher growth here.
Contribution Margin: Baldwin, Chester and Erie have low contribution margins. Please
maintain your margins above 30%. Please automate your plants to bring down your labor bill.
Please price better.
Sales - (Direct Labor + Direct Materials + Inventory Carry)

Sales

reports.

is defined as:
o Price - (Direct Labor + Direct Materials)
Price
o

Is your labor content too high? Labor content is the percentage of Cost of Goods
(COG) consumed by labor expense. For example, if COG is $10, and labor costs are $4,
your labor content is 40%. You can reduce labor content with automation. To a lesser
degree, you can also limit labor content by eliminating overtime and by negotiating for a
more favorable labor contract. A good benchmark for labor content in Capstone is 30%.
costs. Customer behavior is driven by product attributes, awareness, and accessibility.
Emergency Loans: Baldwin has emergency loan. As experienced managers now, you
should avoid emergency loans at all cost. Your company will get pummel on the bourses if
you cannot manage your cash. The reasons for your emergency loans are
Baldwin - For plant improvements of $17.7M, you raised $1M from sale of stock. Raise
funds from long term and current debt to repay this emergency loan.
Plant Size and Utilization: Andrews, Digby, Erie and Ferris have not even used the first shift
capacity of the plant (the plant has 2 shifts). This has lead to an unnecessary depreciation
burden.
Asset Turnover: Digby has asset turnover of below one. Please work your assets harder.
Your assets have to justify their place on their balance sheet. Make them generate more sales
per unit of asset.
Forecasting and Inventory: Chester has high levels of unsold inventory. Please restrict your

Inventory Reserves
$17.3 million.
stockholders.

Traditional Segment: Erie leads the industry.
Low End Segment: Baldwin leads the industry. Cedar does not have the ideal age for
this segment.
High End Segment: Andrews leads the industry. Adam and Bid need improvement in
their specs.
Performance Segment: Chester leads the industry.
Size Segment: Andrews leads the industry. Agape and Cure need improvement in their
specs.
materialize.
1. Depreciation
2. Stock issue
3. Bond issues
and taxes. Why?


A Note to Help you Outline Your strategy
This note was sent to you in the debrief for practice round 3. It is pertinent to revisit it
now.
Teams may find it useful to go through the 6 strategies given on the CAPSIM ( Help>Online
Guide>Six Basic Strategies). It is not necessary to adopt one of these six strategies. They are
simply a broad guide that illustrate that strategic management makes sound business sense. A
well thought through and cogent strategy, well executed will invariably come a winner.
Outline Your Strategy: A Note
At the beginning of the simulation, your team faces an unusual business situation all
companies and products are identical to each other. In the real world this situation rarely if ever
occurs. The closest analogue might be a highly regulated industry.
Looking into the future, the simulated industry will rapidly differentiate and evolve. As in the real
world, nothing you can do will stop it. Given time, the industry will evolve into a state where
competitors occupy defendable strategic positions. There are two important questions. How
long will the process take? Will two or more competitors attempt to occupy the same
position?
Lets use an analogy. Picture a flat landscape. Now imagine several hills placed on the
landscape. Each of the hills represents a strategy. Your success depends upon how quickly you
can identify a hill, and how high you can climb it. Your hope is that you will choose a hill that
nobody else picks, and that you can defend it against competitors. Complicating this is the fact
that some hills are more attractive than others. Further, the more companies trying to climb a
particular hill, the more difficult it is for each of them to successfully climb it.

Are there methods and techniques that will help you identify and select these strategic hills?
Yes, the general topic is widely discussed. Lets look at one of the most commonly referenced,
Michael Porters Generic Strategies. Read the description offered on The QuickMBA website
at http://www.quickmba.com/strategy/generic.shtml (A quick search of www.google.com for
Porter Generic Strategies will turn up hundreds of alternate references. The QuickMBAs one
page summary is an excellent overview of the topic, but feel free to examine others.)

Next, review Chapter 10 of the Student Guide, "6 Basic Strategies."

With this as background, select or develop a strategy you would like your team to pursue.
Prepare and post an argument for your strategy. The argument should address these issues:

1. Segments. Which segments matter to you? How much share of those segments must
you achieve to be an average competitor in the overall industry? For example, if you
choose to play only in Traditional and Low End, you would have to command a higher share of
those segments to achieve average industry sales.
2. Profit potential.
3. The speed at which you can create a defendable position. For example, new products
typically take two years to bring to market. Significant productivity improvements could take
several years.

4. Priorities. Which products are most important to you? Which are least important?

Competitive Advantage and Core Competence: A Note
Let us examine the capabilities your company needs to develop to deliver its strategy. We
assume that your team is about to have a meeting to set long range priorities around
performance capabilities. This note is pre-work for that meeting.

At this point you have a vision, and you have a strategic direction. For example, you might be
saying, We plan to be a high technology company. We will concentrate our resources upon the
High Tech segment. We will compete based upon differentiation. Or you might have decided to
be in every segment and compete on price, or any of a dozen other combinations of vision and
strategy.

But what capabilities do you need to develop to execute your strategy? For example, it is
one thing to say, We will compete on price, and another to build a company that can effectively
compete on price and still produce a solid return for stakeholders.

Lets relate two popular ideas, Core Competence and Competitive Advantage, to your
situation. You will find dozens of references to Core Competence (C.K. Prahalad and Gary
Hamel) and Competitive Advantage (Michael Porter) on the Internet. (For example, try the
QuickMBA. http://www.quickmba.com/strategy/core-competencies/ and
http://www.quickmba.com/strategy/competitive-advantage/.)

You could develop competencies in awareness, accessibility, product redesign, product
invention, automation, plant utilization, human resources, cash flow management, and
forecasting. All of these competencies take several years to develop.

You would use these competencies to develop competitive advantages. For example,
competencies in automation and human resources could lead to a competitive advantage in

cost leadership. Competencies in awareness, accessibility, and design could lead to a
competitive advantage built upon differentiation.

With this as background, think about three key questions:
1. What are the top three competencies you believe necessary to execute your vision
and strategy?
2. What decisions do you need to make to develop these competencies?
3. How will they produce competitive advantage?

A PERTINENT NOTE: Retained Earnings
A query raised by a participant recently was:
I have $X million in retained earnings, but Im unable to use it to retire part of my debt. Why do
I have to borrow when I have such large retained earnings?

It's good that this question was raised. A number of senior execs in industry with fancy MBAs
also falter fundamentally here. Countless MBAs across the world can get top marks in
accounting and finance courses without getting this foundational truth right.

This basic funda, if not cleared now, can stick with the best of us throughout a lifetime.
Capstone will help clear numerous fundas across functions. Pay attention to the basic
accounting equation above.

Remember Assets = Liabilities + Contributed Capital + Retained earnings.

Quite simply, all your retained earnings are not available in the form of cash. Your firm
retained some of the earnings, but it locked up in assets other than cash as your firm made
investments for growth. Look at you balance sheet and compare assets with liabilities.

Why did the firm retain some part of the earnings in the first place, rather than give it back to the
stockholders? Answer: to invest in growth opportunities. Hence the firm invested part or whole
of that cash (from retained earnings) in growth opportunities - e.g enhancing plant size, more

inventory build up , promo etc etc. (keeping it in cash in the current account at the bank would
really not constitute a growth investment).
So in the accounting equation above, as you earn more and retain more earnings and then
make growth investments for your firm, more of your assets are financed by the retained
earnings. You create more assets from those retained earnings. Assets are your use of funds.
The right side of the equation if the source of those funds!
Remember to look at your proforma balance sheet and the finance sheet on Capstone -
observe the capital structure of the firm. Based on your sales forecasts and costs it tells you
how much cash you will have. Remember, it is a projection and may not come true.
It's not for nothing that they say "cash is king". Too little cash can lead to a liquidity crisis during
the ups and downs of business. Too much cash lying idle indicates that the financial managers
in the firm have run out of options to use the funds (and may need to be replaced with others
with more initiative).
You are the CEO, you have to make the choice.

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Capstone Business Simulation 2011: Competition Round 1 SIIB

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